In this article, let's take a look at EastGroup Properties Inc. (EGP), which has announced a dividend hike of 5.3% in its quarterly dividend rate to $0.60 from $0.57.

The stock yields 4.6% if the share price stays at current levels. The hike reflects EastGroup 's policy of returning value to shareholders and helps to continue with a good dividend growth, now at 23 consecutive years.

The company is real estate investment trust that owns a portfolio consisting primarily of industrial properties in the Sunbelt. It has focused on 22 new development projects under construction or initial lease-up that shows its long-term growth potential.

Intrinsic Value

The Yahoo! (YHOO) Finance consensus price target is $62.22, so now let's try to estimate the fair value of the firm, for that purpose I will use the Dividend Discount Model.

In stock valuation models, DDM defines cash flow as the dividends to be received by the shareholders. The model requires forecasting dividends for many periods, so we can use some growth models like Gordon (constant) growth model, the Two or Three stage growth model or the H-Model (which is a special case of a two-stage model).

Once selected the appropriate model, we can forecast dividends up to the end of the investment horizon where we no longer have confidence in the forecasts and then forecast a terminal value based on some other method, such as a multiple of book value or earnings.

Risk-Free Rate: Rate of return on LT Government Debt: RF = 3.03%[1]. I think this is a very low rate. Since 1900, yields have ranged from a little less than 2% to 15%; with an average rate of 4.9%. So, I believe it is more appropriate to use this rate.

Because for most companies, the GGM is unrealistic, let's consider the H-Model which assumes a growth rate that starts high and then declines linearly over the high growth stage, until it reverts to the long-run rate. In other words, a smoother transition to the mature phase growth rate that is more realistic.

G(2), g(3) and g(4) are calculated using linear interpolation between g(1) and g(5).

Now that we have all the inputs, let's discount the cash flows to find the intrinsic value:

Year

Value

Cash Flow

Present value

0

Div 0

2,40

1

Div 1

2,91

2,497

2

Div 2

3,45

2,545

3

Div 3

4,01

2,541

4

Div 4

4,56

2,484

5

Div 5

5,08

2,376

5

Terminal Value

112,09

52,399

Intrinsic value

64,84

Current share price

52,92

Upside Potential

23%

Final Comment

Intrinsic value is above the trading price by 23%, so according to the model and assumptions, the stock is undervalued and subject to a potential "buy" recommendation. However, we must keep in mind that the model is a valuation method, and investors should not be relied on alone to determine a fair (over/under) value for a potential investment.

In my opinion, this stock represents an attractive investment as the economic recovery continues.

Despite this, hedge fund gurus Chris Davis and Jim Simons have reduced the stock in the second quarter of 2015.